Comovements of Budget Deficits, Exchange Rates, and Outputs of Traded and Non-traded Goods

Ashraf Nakibullah

Economic Inquiry, 1993, vol. 31, issue 2, 298-313

Abstract: Between 1974:1-1989:2, it appears that U.S. budget deficits and real exchange rates are correlated. This paper attempts to provide a structural explanation of these comovements in government budget deficits and exchange rates. The model expands on previous wo rks to include fiscal policy considerations in a stochastic set-up. It shows that within a simple two-country cash-in-advance constraint model, it is possible to have a positive correlation between budget deficits and exchange rates, as well as a negative correlation betwe en exchange rates and domestic traded goods production. Copyright 1993 by Oxford University Press.

Date: 1993
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